As tax day approaches many of my clients often ask if they can discharge tax debt when filing Chapter 7 or Chapter 13 bankruptcy. The short answer to the question is: maybe. It is safe for an individual to presume that his or her tax debts will probably not be dischargeable in bankruptcy as a general rule. However, there are certain situations when the tax debt can be discharged through the bankruptcy process. An individual can eliminate his or her tax debt if and only if that person satisfies all of the following five rules:
(1) The due date for filing the tax specific year must be at least 3 years old.
(2) The return must have been filed at least two years before the filing of the bankruptcy petition.
(3) The taxes were assessed by the taxing agency at least 240 days before the bankruptcy.
(4) The return filed is not fraudulent.
(5) The taxpayer has not been found guilty of tax evasion.
This means that the debt must be related to a return that was due at least 3 years before the individual files his/her bankruptcy petition and would also include any dates for extensions. The debt must also be related to a return filed by the individual at least two years before the person files his Chapter 7 or Chapter 13 petition. The time being measured is based on the actual date he or she filed the tax return. Next, the assessment from the agency typically arises from the tax payers self-reported amount due, but can also be from the IRS final determination in an audit or a final proposed assessment. The last two factors are self-explanatory.
Because it is difficult for many people to satisfy the first 3 requirements many people do not fall into a position where he or she can discharge the old tax debts. However, those people who cannot discharge the taxes owed are eligible to file Chapter 13. In Chapter 13 the individual can pay his or her delinquent tax debt over a period of up to 5 years. This leeway often gives people some breathing room so that they can manage the otherwise unreasonable costs associated with having tax liens or wage garnishments placed against them.
Bankruptcy can be a difficult and complex process. There are many nuances that must be taken into consideration in order to ensure the person comes out of the bankruptcy with a clean state and begin with a fresh start. As a Sacramento Bankruptcy Attorney I have helped numerous individuals and families resolve their financial struggles and get back on the right track for their future. If you or someone you know is confronting serious financial issues and needs to speak with an attorney have them contact my office immediately to schedule a free consultation.